Inexperienced investors are losing their life savings, home deposits and inheritances through a regulatory loophole that allows them to be piled into dodgy fixed income and equity accounts offering rosy returns.
Hundreds of investors have lost millions of dollars through fund managers and advisers in recent scams using an antiquated definition of “sophisticated investor” that allows scheme promoters to sidestep retail protections.
The criteria for a “sophisticated investor” has not been changed in 20 years and covers anyone with total assets of $2.5 million, which includes the family home, and gross income for the past two years of $250,000. It has to be certified by an accountant.
Soaring house prices and income bracket creep have enabled the definition to include increasing numbers of investors who meet the net wealth thresholds but who have no knowledge or experience of advanced investment products.
Unsophisticated investors have been victims of recent financial collapses, such as Mayfair 101, which advertised products online, such as M-Core and M+ Fixed Income Funds, as comparable to bank term deposits, or with a similar risk profile to bank term deposits returning single digit returns, depending upon size of the deposit and term.
David Borkovic, a retired builder, chose Mayfair to boost returns on a $200,000 inheritance from his son’s estate for the education of his grandchildren Sienna, 5, and Luces, 9.
His son, Linden, died of a brain tumour aged 34.
Mr Borkovic, 72, who saw Mayfair’s ad online and deposited the money in December 2019, said: “I was led to believe it was as safe as a bank and deposited the money for 12 months.”
Elena Parolin, 60, a retired school teacher, and her husband John deposited around $1 million of their life savings and another $1 million on behalf of her parents, aged 89 and 90 years, in Mayfair 101 in October 2019.
The funds were frozen when she attempted to have them redeemed the following March.
Mrs Parolin, a mother of two children aged 29 and 32, said: “The stress has been insurmountable.”
Her husband, 59, has recently had a stroke, which she blames on the loss, and is wheelchair-bound as a result.
Mrs Parolin said she accumulated the retirement nest egg by saving during her 37-year career teaching mathematics to secondary school students.
Dozens of other investors also have heart-rending stories about losing their life savings in schemes that were advertised as similar to bank deposits.
“They did not have the education, experience or acquired knowledge to be termed ‘sophisticated’. It is increasingly middle- and working-class people who are copping it,” said Milan Cakic, managing partner of MC Lawyers, which has about 100 former investors registered for a class action.
Mr Cakic said it was “anyone’s guess” as to where the money had gone. He said his clients, who have lost a total of between $60 million and $100 million, had no idea it was being invested in highly speculative holiday resorts, offshore funds or possibly propping up other funds offered by Mayfair.
Major financial bodies such as CPA Australia, one of the world’s largest accounting groups, warns failing to upgrade the definition of “sophisticated investor” perpetuates a serious risk to investors.
Jane Rennie, CPA general manager, said: “The ‘sophisticated investor’ exemption pulls in more and more Australians each year. This puts them at greater risk of investing in products they don’t understand and which are not suited to them. It makes them attractive potential targets for unscrupulous operators.”
These include Melissa Caddick, the missing financial adviser who operated below regulatory radar by fraudulently using another adviser’s authorisation and exploiting the “sophisticated investor” loophole.
Misleading and deceptive
The certification removes the requirement to provide certain disclosure documents, such as detailed prospectuses and product disclosure statements that are highly regulated and require extensive due diligence.
A recent Federal Court of Australia judgment on Mayfair 101 concluded that Mayfair savings products were marketed to “inexperienced investors, at least a substantial subset of whom were unlikely to understand the significant risk associated with Mayfair products”.
The judgment, which found Mayfair guilty of misleading and deceptive conduct, was brought by the Australian Securities and Investments Commission.
Mr Borkovic said he had no experience investing and was looking for higher fixed returns than a bank deposit.